ITRA Global News

Sydney Australia Market Report

Over the past few years, the Sydney CBD commercial leasing market has tilted in favour of the landlord, with tightening vacancy rates, unprecedented rental increases and reduced incentives.

Vacancy rates

The Sydney CBD office vacancy rate currently sits well below the 10-year average at circa 6%, amid strong tenant demand and stock withdrawals to accommodate Sydney’s new Metro line and existing commercial-to-residential conversions.

Approximately 200,000 sqm of space has already been removed from the Sydney CBD since the beginning of the year, and although most displaced tenants have now secured new space, the Sydney market faces another period of significantly restricted supply over the next 24 months.

Limited upcoming stock

Despite the introduction of some new stock, including almost 300,000 sqm at Barangaroo and 22,000 sqm at Investa’s Barrack Place at 151 Clarence Street, CBD office supply will tighten further over the next 24 months, thanks to the permanent withdrawal of approximately 300,000 sqm of space.

Rising rents

Off the back of limited supply and tight vacancy rates, Sydney CBD gross face rents continue to increase, though admittedly at a slower pace when compared to previous years.

In 2017, A-grade net face rents grew by 15% to an average of $950 per sqm, and incentives fell to circa 18%. In the secondary market, average net face rents increased by 11% to an average of $725 per sqm, while incentives dipped to approximately 17%.

These rent levels are expected to continue to trend upwards until the next influx of supply in 2020.

Knock-on effects

While tightening vacancy rates and soaring rents continue to benefit landlords, we're also seeing knock-on effects when it comes to tenants’ choice of location and occupancy strategy. Here are a few trends to note:

Increased subleasing

Over the past year, the total volume of subleased space in the Sydney CBD market has risen, and is predicted to increase further among tenants seeking to ease the sting of high rental costs, while securing future growth opportunities.

In 2018, we are expecting to see tenants subleasing their space to co-working companies, which will open up opportunities to network and collaborate with other like-minded professionals and businesses.

Space optimisation

Tenants that seek to consolidate space are now contemplating their 'core space' (the minimum amount of space required for their business to function efficiently) and 'flexible space' (space that can be rented as required).

In fact, we’ve recently seen tenants move from a 1:10 staff/sqm ratio to a 1:8 staff/sqm ratio. Also, we're expecting Floor Space Ratios to tighten even further over the coming years, so tenants can offset the need for more space and save on real estate costs.

Shift to A-grade

Currently, the B-grade vacancy rate is below the market average at around 5.8%. This has pushed rents up by 11% and features significantly reduced incentives – such as rent-free periods and cash contributions for office fit-outs – historically offered to tenants of B-grade office space.

Consequently, the rental gap between A and B-grade space has considerably receded, making it more appealing for B-grade tenants to upgrade to primary stock.

Until 2020, when the next wave of supply is expected to arrive, the Sydney market will remain tight, and competition for quality space will be fierce. Our advice – allow enough time to conduct sufficient research, evaluate your options, and determine a negotiation strategy that will serve your company well over the long term.